Measuring Risk Preferences in Rural Ethiopia

Abstract

Risk aversion is generally found to decrease in income. Between countries, comparative findings with students suggest that people in poorer countries are more risk tolerant, potentially giving rise to a risk-income paradox. We test the robustness of this finding by measuring the risk preferences of 500 household heads in the highlands of Ethiopia. We find high degrees of risk tolerance, consistent with the evidence obtained for students using the same tasks. The level of risk tolerance is higher than for student samples in most Western and middle-income countries. We also find risk tolerance to increase in income proxies within our sample, thus completing the paradox.

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